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Solomon Islands: Staff Report for the 2004 Article IV Consultation

Author(s):
International Monetary Fund
Published Date:
August 2004
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I. Recent Developments

1. Economic performance in the Solomon Islands deteriorated during the last decade. In the early 1990s, real GDP growth averaged 8 percent a year, driven in large part by an unsustainably high level of logging. However, at the same time, the budget deficit increased as the revenue base was eroded by tax exemptions, and the civil service wage bill grew rapidly. In 1996, the government defaulted on its domestic debt obligations, and the level of per capita income declined. Economic pressures increased further when log prices and export volumes declined in the aftermath of the Asian crisis in 1997–98. In response, and in line with Fund staff advice at the time, the government prepared a wide-ranging reform program focused on fiscal consolidation, but program implementation was not sustained.

Real per capita GDP

(1991=100)

2. Conditions worsened further after violence between the residents of the Guadalcanal and Malaita islands erupted in mid-1999. Subsequently, much of the basic infrastructure was destroyed, real GDP declined by one-quarter, and exports halved. The budget deficit increased to over 10 percent of GDP as the government granted numerous import duty exemptions and made large payments, often under duress, to militants that under a peace agreement had been employed onto the police force. These largely squeezed out cash payments for social, development, and debt-service outlays. In the absence of a forceful response by the government to the deteriorating law and order and economic situation, donor support was largely withdrawn. By end-2002 international reserves (net of external debt and import-related arrears) had been virtually exhausted, despite a 30 percent depreciation of the exchange rate and the intensification of exchange restrictions, the rate of inflation had increased to 15 percent, and poverty indicators were deteriorating.

3. At the conclusion of the last Article IV consultation on January 24, 2003, Directors expressed concern at the poor state of the Solomon Islands economy. They stressed the urgency of restoring law and order and implementing policy reforms to arrest the deterioration of the economy. Directors called for strong revenue and expenditure measures, highlighting especially control over the wage bill and the large payments to the ex-militants. They advised that the central bank resist efforts to finance the budget deficit, continue frequent downward adjustments to the exchange rate, and closely supervise the financial sector. Directors also urged that the exchange restrictions imposed in mid-2000 be removed as conditions permit.

4. Facing continued economic decline and growing internal unrest in the first half of 2003, a nine-nation, Australian-led intervention force of over 2,000 military and police officers arrived in July, at the request of Prime Minister Kemakeza. The Regional Assistance Mission to the Solomon Islands (RAMSI) quickly restored law and order in Honiara and in the outlying regions. Australia and New Zealand also placed their nationals in key line-positions in the judiciary and major budget departments to aid in the stabilization effort. During a development partners meeting in Honiara held in November 2003, in which Fund staff participated, donors committed sizable grants to help rehabilitate the economy. Australia has also paid the arrears owed to the World Bank and Asian Development Bank.

5. The government has moved rapidly to stabilize budgetary finances since the arrival of RAMSI. The budget finished the year with a deficit of just 1½ percent of GDP, compared with 10 percent in 2002. This result was mainly attributable to the marked strengthening of tax collections aided by an amnesty on penalties, the termination of payments to the ex-militants, greater scrutiny over the wage bill, the tightening of expenditure controls, and large general budget grants from the major donors. The government’s commitment to prevent new nondebt expenditure arrears from October 2003 has also been strictly enforced.

Fiscal Developments

(In percent of GDP)

6. Economic activity has started to respond to the more favorable law and order and policy environment. Real GDP grew by an estimated 5 percent in 2003, helped by strong fish, copra, and cocoa production. Foreign investors have expressed renewed interest in major natural resource projects, and private sector credit growth has increased as lending interest rates have declined. Overall credit growth, however, has remained low as the large aid flows and the budget surplus since mid-2003 have increased the level of government deposits held at the central bank.

Growth and Inflation

(In percent)

Monetary Developments

(In SI million dollars)

7. Other economic indicators have also been encouraging. By May 2004, international reserves had increased to almost $40 million (net of external arrears), reflecting higher export volumes and world commodity prices, the slow pick up in import demand, large aid flows, and the remonetization of the economy. Inflation has fallen back to single-digit levels, as the supply of food has increased and the nominal effective exchange rate has stabilized. Urban employment is reportedly increasing, although unemployment remains high.

International Reserves

(millions of U.S. dollars)

Exchange Rates

(Index for NEER/REER 1990=100)

II. Policy Discussions

A. The Medium-Term Framework

8. The policy dialogue during the mission focused on how to use the window of opportunity provided by the high level of donor assistance to support macroeconomic stability, sustain private-sector-led growth, and improve social indicators. The authorities have welcomed the military, financial, and technical assistance they have received and, following the restoration of law and order, have taken early action to ensure that this assistance was used in a way that has been consistent with previous Fund advice. The government has completed its National Economic Recovery, Reform, and Development Plan, and established three tasks forces covering the restoration of law and order, economic reform, and infrastructure and government services, which have also completed their reports. Taken together, these documents outline a broad medium-term agenda to lift per capita income, focused on the rehabilitation of the economy (especially in the rural areas) and strengthened governance and financial management (Box 1).

9. A major uncertainty in crafting a medium-term strategy is estimating the level and time period of donor assistance. The general purpose budget grants being provided by Australia and New Zealand are scheduled to end in 2004 and 2006 respectively, although some of this assistance may be extended. The European Union has committed development grants amounting to $100 million, but the disbursement period is uncertain. The Asian Development Bank has fielded a mission to restart a $10 million lending program they suspended in 2002, focused on rehabilitating transport infrastructure, and disbursements might start by end-2004. While they have no lending plans, the World Bank is providing grants to strengthen capacity in key government institutions.

10. Notwithstanding this uncertainty and the significant impediments to private sector investment and growth (Box 2 and the accompanying Selected Issues paper), the authorities and staff agreed that the growth of real GDP during 2004–09 could average 4½–5 percent a year (2 percent per capita) provided appropriate policies are implemented. In the medium-term scenario and debt-sustainability analysis discussed, inflation would remain in low single digits and the level of international reserves slowly increase, assuming that fiscal and monetary discipline is maintained. Economic growth would initially be driven by donor-financed public investment, and later by rising private investment and exports provided an early start is made to reducing the current regulatory burden and implementing other critical structural reforms. The current account deficit as a share of GDP would gradually decline as exports increase and the level of project-related imports falls back. Assuming the budget deficit averages ½ percent of GDP and the level of new foreign borrowing is contained, which would be appropriate in view of the large fiscal uncertainties and limited absorptive capacity beyond the large grant-financed development spending, the government debt ratio would decline from 100 percent in 2003 to 65 percent of GDP by 2009. External debt would decline to 42 percent of GDP and the servicing burden would remain sustainable, although it was recognized that economic shocks could have a major impact on the projected debt dynamics.1

B. Fiscal Policy

11. To achieve these objectives, the authorities stated that their first priority is to adhere to a fiscal framework for 2004 that can restore confidence in the government’s ability to manage its finances. Following the first of their quarterly reviews of actual budgetary developments, the authorities project a budget surplus (measured on an accrual basis) of 4 percent of GDP, significantly higher than the 2 percent surplus forecast in the 2004 budget that was passed last November. This result is mainly attributable to overperformance on revenue collections in recent months (mainly on sales tax collections), reflecting the recent faster-than-expected pace of economic and export growth, successful efforts to bring businesses back into the tax net, and collection of tax arrears under the amnesty (that was closed at end-2003). The authorities shared staff concerns in regard to the one-off nature of some of these receipts and, more generally, the uncertainty surrounding the future level of revenue collections. In the draft Supplementary Appropriations Bill that was subsequently passed by the parliament, rather than undertaking new expenditure obligations, the government proposed that the higher projected surplus be used to reduce the large stock of expenditure arrears. The staff fully supported this position.

12. The staff welcomed the advances that have been made in reprioritizing expenditures in 2004. Progress has been achieved in cleansing the civil service payroll of ghosts, restricting allowances, demobilizing around 800 ex-militants from the police force, and initiating a New Zealand-funded audit of education sector employment. The authorities noted that the savings realized to date had enabled them to raise the nominal wages of the remaining civil servants by 5 percent. In regard to other outlays, they noted that the pace of spending on nonwage social and development expenditures has been slower than envisaged due to low absorptive capacity, but is expected to pick up shortly.

13. The authorities outlined their approach to strengthen medium-term fiscal finances taking into account the ongoing large rehabilitation expenditures, expected decline in donor flows, and rising operations and maintenance spending associated with the new development projects. They highlighted in particular the following aspects:

  • To strengthen budget management, the authorities have started to prepare a medium-term fiscal strategy. The staff suggested this be set within an explicit macroeconomic and fiscal financing framework.
  • The authorities have initiated a multi-year revenue mobilization effort to widen the tax base and strengthen administration. They indicated that they intend to focus on registration of businesses, training of staff, and increased use of audits, utilizing technical assistance from the Pacific Financial Technical Assistance Center (PFTAC).2 In this regard, the staff urged that the future tax base not be eroded through income-tax exemptions for existing and new foreign or domestic investments.
  • In addition to the efforts underway to reorganize the civil service, the authorities stressed their intention to further rationalize expenditures over time. The staff and authorities agreed that the priority should be placed on reallocating spending toward basic health and education, inter-island transport, rural infrastructure and extension services, and operations and maintenance outlays. It will be important that the actual level of development spending is continually monitored and that these outlays remain focused on the medium-term priorities.

14. Resources will also be required to regularize and reduce external and domestic debt and arrears obligations. The authorities indicated that they are committed to finalize a rescheduling agreement with their domestic creditors (mainly the commercial banks, the National Provident Fund, and the central bank) in the next few months, with the terms of the agreement guided by the authorities’ intention to ensure that total external and domestic debt servicing not exceed 15 percent of projected domestic revenue. Thereafter, the authorities intend to discuss with their commercial and some bilateral creditors plans to reduce external debt levels and servicing costs.3 In regard to the stock of expenditure arrears (the bulk of which are due to utility companies, for wage-deductions due to pension, credit, and trade unions, and to trade creditors), once their legitimacy has been verified, these are expected to be paid down as circumstances permit.

15. The authorities discussed their plans to establish a federal structure in the Solomon Islands that would include a significant degree of budget decentralization as a means to decrease inter-island tensions. In response to concerns expressed earlier by the donor community and the staff, the authorities noted that they would proceed only very cautiously. The authorities generally agreed with the staff that the national budget should first be stabilized, and an expenditure monitoring system maintained by the Ministry of Finance of provincial revenue and expenditure be put in place, before implementing this plan, and that provinces should not be allowed to run budget deficits.

C. Monetary, Exchange Rate, and Financial Sector Issues

16. The discussion of monetary and exchange rate policies focused on the Governor’s annual monetary statement, which was delivered on April 8. The staff agreed with the main objectives for 2004 set out in this statement, namely to maintain inflation in single-digit levels and increase international reserves to at least five months of nonproject imports. The staff pointed out the significant risks to meeting these objectives posed by the high level of excess reserves in the banking system (roughly 20 percent of deposits) and the large government deposits at the central bank representing aid flows for investment projects. The authorities acknowledged these risks, but they did not expect a sharp increase in private sector lending or a sudden drawdown in government deposits. Should either of these events occur, the central bank would move quickly to absorb liquidity in the system. Instruments at their disposal include changes in reserve requirements, direct controls on lending, and open market operations. The authorities noted that their ability to conduct open market operations will be enhanced once the government’s debt restructuring plan has been implemented.

17. The staff team supported the central bank’s policy to resist upward pressure on the exchange rate arising from the large aid flows in order to build reserves. Partial price and recent trade data available suggest that the current level of the exchange rate is broadly competitive, although recent export volumes have been more determined by domestic supply constraints rather than demand factors.4 With the restoration of law and order and improvements in inter-island transportation, exports of traditional and new products are expected to continue to increase. Over time, as aid flows diminish and imports rise in line with the economic recovery, the staff recommended that downward pressure on the exchange rate should not be resisted. The authorities generally concurred with this advice, adding that, in the current environment, they are not considering major changes in the present exchange rate regime, such as a move to dollarization. The authorities gradually liberalized the exchange system during 2003, and the staff team welcomed the recent elimination of the remaining restrictions on current transactions.5

18. The authorities noted that they have taken several steps to strengthen the financial sector. The central bank has been vigilant in ensuring that the commercial banks comply with prudential guidelines, and bank profitability has improved since law and order was restored (Box 3 and the accompanying Selected Issues paper). In line with the widening of its supervisory powers in mid-2002, the central bank has also acted to address difficulties in major nonfinancial institutions. Following an on-site inspection in late-2003 and aided by technical assistance from the World Bank, the poor asset quality of the National Provident Fund (NPF) is being gradually addressed. The High Court has approved a central bank request to assume management of the small and insolvent Development Bank of Solomon Islands (DBSI), and the staff team suggested that the operations of the DBSI be wound up.

D. Structural Reforms and Other Issues

19. There was widespread agreement that structural reform will be critical to lift private sector activity and employment. Increasing attention is being focused on promoting new investment and employment, especially in potential growth sectors like gold and mining, palm oil production, and tourism, as well as by local manufacturing concerns. The discussions with the private sector indicated the importance of streamlining licensing procedures, especially by the Foreign Investment Board, and relaxing the limit on foreign labor permits, to further this process. Encouraging small-scale production and inter-island distribution of potential new export crops such as vanilla, teak, and seaweed were widely cited as necessary to increase employment and income generation in the rural areas. The authorities noted that they are preparing a strategy to ensure the sustainable development and management of the forestry and fisheries sectors, and a policy to address land ownership issues. The World Bank and Asian Development Bank are providing technical assistance in several structural reform areas, including through the World Bank’s Foreign Investment Advisory Service (FIAS).

20. The staff team pressed for reform of public enterprises in order to reestablish reliable supply and improve the quality of utility services. The authorities stated that price increases have already been undertaken in some enterprises, but acknowledged that further efforts will be needed. These could include publishing annual reports, improving the regulatory environment, capital investments, strengthening governance, and rationalizing the workforce. The staff called for the reinvigoration of the enterprise corporatization and privatization program that has stalled in recent years, noting that any proceeds should be used to pay down government debt.

21. The authorities confirmed their intention to continue to promote an open trade regime. Starting in 1998, the authorities have reduced tariff rates from five bands that ranged from 5–70 percent to three bands that range from 5–20 percent. The weighted average tariff now stands at 11 percent, and there are no significant nontariff barriers. There are several export taxes, although the export tax on logs is the only large revenue earner. The authorities noted that the log export tax has traditionally served as a substitute for the weaknesses in tax administration over these companies, and the staff urged that this policy be reviewed as the tax administration procedures are strengthened. In the context of the Pacific Island Countries Trade Agreement (PICTA), which was signed in 2003, the Solomon Islands has committed to eliminate tariffs for trade in goods between members by 2016 at the latest.6 The Solomon Islands does not face any major problems in accessing export markets, and is rated three under the Fund’s 10-point trade restrictiveness index.7

22. The authorities stated that several initiatives are underway to strengthen governance and transparency, and to reduce corruption. In addition to the improvements in law, justice, and policing, donor assistance is being provided to strengthen key government institutions and watchdog bodies such as the Auditor General and Ombudsman. Budgetary and Cabinet requirements and procedures are also being addressed. The staff team noted that better governance and transparency will assist in ensuring a level playing field within the private sector, and welcomed the intention to establish the Solomon Islands Leadership Integrity Commission, utilizing external technical assistance.

23. The authorities have prepared a legal framework to address anti-money laundering (AML), although they have not started enforcing AML procedures and a counter-financing of terrorism bill is still in draft form. In response to staff queries, the authorities explained that their AML legislation comprises three laws that require banks and cash dealers (insurance companies, casinos, and trusts) to report to a Commission any transaction exceeding SI$15,000 that they feel is suspicious.8 However, this Commission has not yet been established. The authorities have recently completed the questionnaire on AML/CFT that was prepared by MFD, and the staff is following up on this response. The authorities noted that local staff has benefited from training abroad in AML/CFT enforcement, and that they are seeking PFTAC assistance to review and assist implementation of the relevant legislation in this area.

24. The mission stressed that macroeconomic analysis continues to be hampered by the poor statistical database. The National Statistical Office (NSO) ceased compiling real and nominal national accounts estimates in 1994 and, until very recently, price data in 2000. The only data available have been partial estimates assembled by the central bank. PFTAC is preparing a plan to rehabilitate the NSO and improve the quality and timeliness of data collection and reporting, and the World Bank is also undertaking a capacity building initiative in this area. The authorities agreed that progress under this plan is a priority.

III. Staff Appraisal

25. Economic performance in the Solomon Islands has shown a marked turnaround since the last consultation was concluded in early 2003. The economy has started to respond to the more favorable law and order conditions and improved budgetary finances, with growth accelerating and inflation falling to single digits. Nonetheless, the situation remains fragile, and the main challenge for the government is to move beyond the initial focus on stabilization, and implement policies that will reduce the risks to the medium-term outlook and underpin a sustained improvement in per capita growth.

26. Key fiscal, monetary, and structural reforms will be needed to achieve these objectives. Budget finances have to be further strengthened so that the programmed increases in social and development outlays (including for critical infrastructure) can be sustained while at the same time the high government debt ratio is set on a firm downward path. Price stability must be maintained in the face of the resumption of economic activity and ongoing large donor flows. In addition, deep structural reform is needed so the private sector can play an increasing role in boosting investment and promoting employment in the urban and rural areas, while generating sufficient foreign exchange earnings to offset the projected increase in imports as the economy recovers.

27. The revised budget surplus targeted by the authorities for 2004 is consistent with further improving the macroeconomic situation. In view of the one-time nature of the recent revenue overperformance and the ongoing budget uncertainties, including the level of external grants from major donors after 2004, expenditure allocations should not be ratcheted up in line with these collections. It is appropriate that the Supplementary Appropriations Bill proposed to use the bulk of the projected revenue overperformance in 2004 to pay down wage-related and other arrears.

28. Expenditure reprioritization is critical to sustain economic growth and improve social indicators. Accelerating the pace of civil service reform is key to strengthening capacity in the public sector. While progress has been made, continued efforts are needed to rationalize the civil service, with an increase in the skills capacity while reducing costs in nonpriority areas. Maintaining control over salary increases will be vital. If any further general wage increase is contemplated, this should be undertaken only in the context of realized savings in the rest of the wage bill. Priority should be placed on reallocating spending toward basic health and education, rural infrastructure and extension services, and operations and maintenance outlays.

29. Given the large ongoing expenditure pressures to rehabilitate and restructure the economy, it is critical that the fiscal decisions are consistent with medium-term sustainability. A comprehensive medium-term fiscal framework should be developed and updated regularly as circumstances evolve. This should include an analysis of actual development project spending and its operations and maintenance components. The authorities’ debt restructuring plan and strategy to repay arrears are also appropriate.

30. Strengthened revenue performance over the medium term will be required to fund new productive expenditures and reduce the high dependency on donor flows. Revenue efforts should primarily focus on widening the tax base and strengthening tax and customs administration, which would provide an opportunity for a review of the current range of export taxes. To ensure a level playing field and prevent erosion of the future tax base, no new income-tax exemptions for foreign or domestic investments should be granted and consideration could be given to abolishing existing tax and customs exemptions.

31. Solomon Islands is not ready to implement a decentralization plan in the context of a federal Constitution that would ensure that fiscal stability is maintained. If it is decided to proceed in this direction, it will be essential that the national budget has been stabilized and that an expenditure monitoring system for provincial revenue and expenditure has been established. Thereafter, safeguards need to be in place to guard against an undue weakening of the national budget as revenue is devolved.

32. Monetary policy objectives for 2004—containing inflationary pressures and increasing the level of international reserves—are appropriate. Given the current high levels of excess liquidity and government deposits, continued vigilance will be needed to ensure these objectives are achieved. Upward pressure on the exchange rate should continue to be resisted in order to build reserves. As imports increase and aid flows diminish over time, downward pressure on the exchange rate should not be resisted. The recent elimination of the remaining exchange restrictions will contribute toward ensuring that the exchange rate remains appropriately aligned.

33. Financial sector reform can assist in sustaining medium-term growth. The improvement in law and order has helped to strengthen profitability of the banking sector, and continued vigilance by the central bank to enforce its prudential guidelines will be needed. The recent efforts to strengthen the asset quality of the NPF, and to settle the future of the DBSI, are welcome steps. Implementation of AML/CFT laws should be undertaken as a priority.

34. Structural reform is critical to lift private activity and employment. Reform of the Foreign Investment Board, foreign labor permits, and licensing procedures is needed to promote new investment, especially in potential growth sectors. Encouraging small-scale production and inter-island distribution of potential export crops will be important, as is the need to ensure the sustainable development and management of the forestry and fisheries sectors. Reform of public enterprises is necessary to strengthen their financial balances and the quality of their services. Future trade liberalization will also assist in promoting private sector development. Strengthening institutions, enhancing governance and transparency, and reducing corruption are clearly critical to support sustained economic growth.

35. The Solomon Islands’ economic statistics framework remains weak. Improved statistics are essential to the effective execution of the government’s reform agenda, and efforts in this area should be given full support by the government and responsible agencies.

36. It is recommended that the next Article IV consultation with the Solomon Islands be held on the standard 12-month cycle.

Box 1.Solomon Islands: National Economic Recovery, Reform, and Development Plan

The National Economic Recovery, Reform, and Development Plan (NERDP) was completed at end-2003 and covers the period through 2006. The plan addresses the short-term needs for economic recovery in the Solomon Islands, while laying out the foundations for growth and development over the medium term. The plan was prepared principally by the Ministry of National Reform and Planning, in consultation with a wide range of stakeholders including ministries, parliamentarians, provincial governments, private sector, civil society organizations, and the donor community. Each government ministry was assigned responsibility for a sector, developed key targets for 2006, prepared a work plan to achieve these targets, and is required to monitor and report progress on a regular basis.

Five strategic areas are identified in the plan, with objectives as follows:

  • Normalizing law and order and the security situation: Enhancing the capabilities of the police force (including demobilizing ex-militants and reintegrating them into the community), the Attorney General’s Chambers, the Public Prosecutor, the Public Solicitor, and the judiciary.
  • Strengthening democracy, human rights, and good governance: Establishing a federal structure, and strengthening the transparency, audit, and accountability of public decisionmaking and the management of public resources.
  • Restoring fiscal and financial stability and reforming the public sector: Mobilizing domestic revenue, regularizing formal and informal government obligations, following appropriate monetary and exchange rate policies, assisting rural sector access to credit, reorganizing the public sector, and reform of the state-owned enterprises.
  • Revitalizing the productive sector and rebuilding supporting infrastructure: Sectorspecific policies to revitalize the agriculture, forestry, fisheries, mining, and tourism sectors. Rebuilding supporting infrastructure in relation to land, energy, water, and the environment.
  • Restoring basic social services and fostering social development: Restoring basic and secondary health and education services, and promoting gender equality and community development.

In mid-2003, the Cabinet also established three taskforces covering the restoration of law and order, economic reform, and infrastructure and government services. Each taskforce was headed by a former Prime Minister and charged with providing recommendations to strengthen progress toward the priorities highlighted in the NERDP. The subsequent final reports of the taskforces collectively stress the importance of rural development, where the majority of Solomon Islanders live. While recognizing a major part of rural development efforts will remain donor-financed in the near future, the reports call for greater participation of the rural sector and provincial authorities in the design and implementation of development projects.

Box 2.Solomon Islands: Impediments to Growth and Poverty Reduction

Real per capita GDP of the Solomon Islands was 7 percent lower in 1999 than at independence in 1978, even before the civil conflict during 1999–2003 reduced real per capita GDP by another onequarter. Solomon Islands also lags behind most other Pacific Island countries in terms of social indicators. Malaria is rampant, with the highest rate of infection in the world outside of sub-Saharan Africa, and more than a third of the rural population lacks access to safe water. The limited infrastructure, remote geographical location, lack of well-defined property rights, and inadequate education and health services are major obstacles to achieving a higher sustained rate of economic growth.

Agriculture: More than 80 percent of the population live in the rural areas and engage in subsistence or semi-subsistence agriculture. Taking their produce to market is a challenge for smallholders as transport in and between the islands is inadequate. Small producers also lack financial services and technical assistance, and hence other cash crops successfully exploited in the region, such as vanilla, have not been grown. The other component of the agricultural sector, large-scale plantations, has been restrained by the difficulty in acquiring land, most of which is communally owned and lacks titles.

Forestry: Timber extraction is an important source of fiscal revenue and foreign exchange earnings, accounting for two-thirds of the value of merchandise exports. The current level of extraction is estimated to be two to three times above the sustainable level. The main issues are better governance of the sector and encouraging sustainable forestry practices. Foreign operators often exploit uncertainty in the ownership of the land by compensating an individual rather than the collective body of owners.

Fishing: The Solomon Islands has large fish resources. Artisanal fishing is widespread for the primary purposes of subsistence and local sales. Small producers cannot access larger markets due to poor interisland transportation; most of the fish consumed in Honiara is of the canned and frozen variety. Two major companies export most of their catch, although the cost of transport to the main export markets in Asia is high. Private companies are also disadvantaged by a tax concession enjoyed by the largest firm, which is owned by the government.

Mining: There are rich gold and nickel resources in the Solomon Islands, which are not currently exploited. The Gold Ridge mine was closed at the height of conflict in 2000, and its infrastructure and assets have been severely damaged. The main risk for mining operations is the uncertain legal status of land. Mining companies cannot buy land, and the profit-share arrangements with landowners are often challenged by other claimants to the land.

Tourism: The Solomon Islands has many natural and cultural attractions. Its pristine coral reefs, rich marine life, and large number of World War II wrecks provide for world-class diving and snorkeling opportunities. However, the existing tourism facilities are insufficient, and concentrated in Honiara, eschewing the natural attractions of the outlying areas. While security warnings have been lifted, disease risks and costly air travel discourage tourists.

Manufacturing: Manufacturing is of limited scale in the Solomon Islands, mainly consisting of processing agricultural commodities such as coconut and palm oil and fish processing. There has been little foreign direct investment, and domestic enterprise development has been hindered by the security situation and lack of entrepreneurial experience. The urban areas, particularly Honiara, have grown rapidly, but employment opportunities in the formal sector have remained limited. Even before the outbreak of the conflict in 1999, only one in three men aged 20–24 was estimated to be engaged in paid employment; for women, the ratio was less than one in six.

Box 3.Solomon Islands: Financial Sector Soundness and Supervision

The Solomon Islands’ financial system comprises the Central Bank of Solomon Islands (CBSI), three commercial banks (one of which is domestically owned), the National Provident Fund (NPF), the Development Bank of Solomon Islands (DBSI), and a number of small nonbank financial institutions (credit unions, insurance companies, and housing schemes). The commercial banks are reported financially sound despite the difficult economic environment in recent years that was compounded by the government debt defaults. However, the asset quality of the NPF—the largest financial institution—has been severely impaired, and the DBSI has become illiquid and likely insolvent.

Central Bank Soundness: The CBSI’s balance sheet has shown a net liability in recent years (SI$28 million in 2003 versus net assets of SI$102 million in 1998) due to full provisioning by the CBSI against its holding of government debt, all of which is in default. The CBSI’s financial position is expected to strengthen once the government debtrescheduling discussions are completed.

Central Bank Supervision: Under the 1998 Financial Institutions Act, the CBSI is the prudential regulator for the commercial banks, and its mandate was extended to cover the NPF and DBSI in August 2002. Supervision of the insurance sector will fall under CBSI purview in mid-2004. Prudential standards are generally in accordance with Basle Core Principle and are enforced by the CBSI through off-site and on-site inspections, with the NPF and DBSI covered for the first time in 2003. However, the majority ownership status of the National Bank of Solomon Islands (NBSI), the largest commercial bank, by three local trust funds remains a pending issue, as the trusts do not meet the guidelines “fit and proper” criterion. The CBSI took legal actions against a pyramid scheme in 2003, reiterating its strong commitment toward safeguarding the financial system.

Commercial Banks Performance: The assets of the commercial banks amount to 32 percent of GDP. Prudential indicators indicate that, both as a group and individually, the commercial banks were broadly sound as of end-2003.

Capital Adequacy. The average risk-weighted capital ratio was 28 percent in 2003, with all three banks well above the 10 percent prudential requirement; the latter may be raised to 15 percent as of mid-2004.

Asset Quality. NPLs gradually increased from SI$6 million (3 percent of total loans) before the tensions erupted in 1999 to reach SI$20 million (11 percent) in 2002, before declining to SI$16 million (8 percent) as performance improved in 2003.

Earnings and Profitability. The return on average assets was 5 percent in 2003 versus 3 percent in 1999. Since 2002, noninterest income has accounted for the bulk of earnings (65 percent of total operating income in 2003 versus 43 percent in 1998), largely as a result of earnings on foreign exchange transactions and from fees and charges.

Liquidity. Liquid asset reserves accounted for 28 percent of total deposit liabilities in 2003 as against 14 percent in 1998, significantly exceeding the 7.5 percent prudential requirement.

National Provident Fund: The NPF is a compulsory saving scheme aimed at earmarking a portion of formal wage income primarily for retirement purposes. Its assets equal two-thirds of banking sector assets. The NPF’s assets are comprised of government securities (25 percent), loans (17 percent to government entities and 14 percent to members), shares in public enterprises (18 percent), and the remainder in property and cash deposits. A large portion of its portfolio consists of nonperforming assets, largely reflecting the government debt default, lending to provincial governments (under government guarantee), and for housing loans to NPF members. Operating surpluses have declined in the last four years owing to the impact of the civil conflict, and the heavy withdrawal of contributions by employees made redundant. Government arrears on contributions have also compounded the NPF’s liquidity situation. The NPF is in the process of implementing recommendations from the CBSI’s recent audit and is reviewing its investment guidelines with World Bank technical assistance.

Development Bank of Solomon Islands: The DBSI is a government-owned development lender. Its assets (net of provisions for bad debt), which account for 7 percent of banking sector assets, are severely impaired reflecting weak governance and a poor credit culture. The DBSI is illiquid (2.6 percent liquidity ratio versus 7.5 percent required for commercial banks). Its provisions for bad debt (38 percent of total loans) are understated, and its deposit liabilities (SI$20 million) and borrowing obligations (SI$28.5 million, of which SI$24 million is due to foreign creditors) are in default. As a result, the DBSI has likely become insolvent. In accordance with the provisions under the 1998 Financial Act, in June 2004 the High Court assigned the CBSI as the provisional manager for DBSI.

Table 1.Solomon Islands: Selected Economic Indicators, 1998–2004
Nominal GDP (2003):US$226 million
Population (2003):455,000 est.
GDP per capita (2003):US$496
Quota:SDR 10.4 million
Sources: Data provided by the Ministry of Finance; Central Bank of Solomon Islands; and Fund staff estimates and projections.

Staff projections.

Expenditures are presented on an accrual basis.

Includes recurrent budget grant support; amortization payments are classified as budget financing.

Overall balance is calculated from below-the-line financing data.

Includes debt amortization arrears.

19981999200020012002Est.

2003
Proj. 1/

2004
Growth and prices (percentage change)
Real GDP1.8-0.5-14.3-9.0-1.65.14.2
Of which: Marketed output2.5-1.5-19.9-13.9-3.68.04.9
CPI (period average)12.38.06.97.69.410.15.6
CPI (end-of-period)10.37.37.66.515.43.85.1
Saving and investment (percent of GDP)
Public saving-investment balance-0.3-3.7-4.9-11.9-9.6-1.44.0
Of which: Public investment7.24.34.68.93.215.718.1
Private saving-investment balance-1.36.9-5.6-0.92.62.9-4.6
Of which: Private investment15.216.017.114.114.917.017.2
Central government operations (percent of GDP)
Total revenue29.027.022.123.518.739.848.1
Recurrent revenue21.924.418.315.316.121.523.5
Grants7.12.63.78.22.618.324.6
Total expenditure 2/28.230.329.736.129.739.644.1
Recurrent expenditure21.026.025.127.226.523.826.0
Development expenditure7.24.34.68.93.215.718.1
Recurrent balance 3/3.2-1.3-6.1-11.7-9.91.54.0
Overall balance 4/-0.3-3.7-4.9-11.9-9.6-1.44.0
Foreign financing (net)4.91.90.65.03.80.4-1.1
Domestic financing (net)-1.4-0.14.2-1.4-2.9-6.6-0.4
Privatization receipts0.01.80.00.00.00.00.0
Increase in expenditure arrears-2.4-0.41.43.63.54.0-5.0
Increase in principal arrears-0.80.5-1.24.75.23.6-8.9
Restructured arrears0.00.00.00.00.00.011.4
Stock of expenditure arrears (percent of GDP; end-of-period)3.63.14.78.511.514.48.1
Stock of domestic principal debt arrears (percent of GDP; end-of-period)0.00.00.03.97.19.90.0
Central government debt (percent of GDP) 5/62.262.565.482.296.2100.292.5
Domestic24.523.123.533.229.527.626.4
External37.739.342.049.066.772.666.1
External debt (in millions of U.S. dollars; end-of-period)122.2130.5125.6134.3151.6163.9159.7
External debt service to exports of GNFS (accrual basis)2.62.73.98.110.18.86.3
Monetary and credit (percentage change; end-of-period)
Net foreign assets47.98.9-39.8-31.830.2106.449.7
Net domestic assets-23.00.746.8-4.4-4.8-11.0-21.6
Credit to government (net)-20.3-0.443.83.413.1-17.1-6.0
Credit to private sector25.38.31.8-21.812.226.112.0
Broad money2.34.90.5-13.24.026.015.2
Interest rate (3-month Treasury bill rate, average)6.06.07.38.98.36.6
Balance of payments (millions of U.S. dollars; unless otherwise indicated)
Exports, f.o.b.126.3121.765.147.158.274.283.0
Imports, c.i.f.-127.8-111.3-98.1-90.6-62.3-85.2-102.0
Current account-5.110.4-31.7-35.1-15.73.2-1.4
(Percent of GDP)-1.63.1-10.6-12.8-6.91.4-0.6
Capital account15.1-1.28.517.26.311.016.1
Overall balance (accrual)9.99.2-23.1-17.9-9.414.314.7
Gross official reserves (millions of U.S. dollars; end-of-period)48.050.431.318.517.535.952.1
(in months of next year’s imports of GNFS)3.64.63.12.82.13.64.5
Exchange rate (SI$/US$, end-of-period)4.865.085.105.567.467.49
Real effective exchange rate (period average; 1990=100)112.2115.1122.8133.5111.196.5
Nominal effective exchange rate (period average; 1990=100)66.864.165.367.452.441.8
Sources: Data provided by the Ministry of Finance; Central Bank of Solomon Islands; and Fund staff estimates and projections.

Staff projections.

Expenditures are presented on an accrual basis.

Includes recurrent budget grant support; amortization payments are classified as budget financing.

Overall balance is calculated from below-the-line financing data.

Includes debt amortization arrears.

Sources: Data provided by the Ministry of Finance; Central Bank of Solomon Islands; and Fund staff estimates and projections.

Staff projections.

Expenditures are presented on an accrual basis.

Includes recurrent budget grant support; amortization payments are classified as budget financing.

Overall balance is calculated from below-the-line financing data.

Includes debt amortization arrears.

Table 2.Solomon Islands: Balance of Payments, 1998–2004(In millions of U.S. dollars)
199819992000200120022003Proj.

2004
Current account balance-5.110.4-31.7-35.1-15.73.2-1.4
Current account balance (excluding official transfers)-16.88.9-19.1-49.7-10.3-10.1-17.6
Trade balance-1.510.4-32.9-43.5-4.0-11.0-19.0
Merchandise exports, f.o.b.126.3121.765.147.158.274.283.0
Of which: Timber40.851.844.136.138.149.554.1
Of which: Fish40.332.98.17.110.512.414.0
Merchandise imports, c.i.f. 1/127.8111.398.190.662.385.2102.0
Of which: Petroleum21.515.518.414.411.211.714.5
Services and income (net)-15.3-1.513.8-6.3-6.30.91.4
Nonfactor services (net)-8.14.314.6-6.4-0.56.03.7
Exports59.152.548.624.716.721.221.8
Imports67.248.234.031.117.115.318.1
Net factor income from abroad-7.2-5.8-0.80.1-5.8-5.1-2.3
Credit3.05.47.26.22.73.53.9
Of which: Interest1.72.72.71.10.50.70.9
Debit10.111.28.06.18.58.66.2
Of which: Interest1.61.61.82.94.34.92.4
Net current transfers11.61.5-12.614.7-5.413.416.1
Private sector4.60.1-13.35.0-12.34.26.2
Public sector7.11.40.79.66.89.29.9
Capital account balance15.1-1.28.517.26.311.016.1
Government sector22.97.37.318.35.812.217.6
Monetary authorities (net)0.00.00.00.00.00.00.0
Medium- and long-term lending16.06.61.713.92.7-0.5-4.2
Inflows19.39.74.416.86.03.10.0
Amortization3.33.12.72.93.33.64.2
Investment flow (projects)6.90.75.54.43.112.721.8
Private sector-7.8-8.51.3-1.10.5-1.2-1.5
Investment activities0.02.72.41.01.0-0.2-0.2
Medium- and long-term lending-7.6-9.6-0.5-1.20.0-0.7-0.8
Inflows2.80.70.40.00.50.00.0
Amortization10.410.30.91.20.50.80.8
Other flows-0.3-1.6-0.7-0.9-0.5-0.3-0.6
Overall balance (accrual)9.99.2-23.1-17.9-9.414.314.7
Commercial bank holdings (increase)-2.75.1-3.63.51.42.00.0
Errors and omissions7.9-2.7-2.2-4.57.52.80.0
Exceptional financing-4.10.92.713.02.33.41.5
Interest arrears-0.4-0.31.22.43.52.80.0
Amortization arrears-3.71.21.52.33.01.50.0
Pending foreign exchange import requests0.00.00.08.3-4.3-2.4-0.1
Debt forgiveness0.00.00.00.00.01.51.5
Overall balance (cash)16.42.4-19.1-12.8-1.018.416.2
Memorandum items:
Gross official reserves (millions of U.S. dollars)48.050.431.318.517.535.952.1
(in months of next year’s imports of GNFS)3.64.63.12.82.13.64.5
(in months of next year’s non-project imports of GNFS)3.94.93.73.32.64.55.5
Net international reserves (excluding external arrears; in millions of U.S. dollars)37.936.724.40.90.617.633.8
(in months of next year’s imports of GNFS)2.93.32.40.10.11.82.9
Central government external debt (millions of U.S. dollars)122.2130.5125.6134.3151.6163.9159.7
(in percent of GDP; including debt amortization arrears)37.739.342.049.066.772.666.1
External arrears (interest plus principal; millions of U.S. dollars)8.410.74.67.111.113.813.8
Exports of GNFS/GDP57.252.538.026.232.942.343.4
Imports of GNFS/GDP60.148.144.144.434.944.549.7
Current account (including transfers)/GDP-1.63.1-10.6-12.8-6.91.4-0.6
External debt-service to exports of GNFS2.62.73.98.110.18.86.3
External debt-service to ordinary budget revenue6.95.88.113.920.717.411.7
Exchange rate (SI$/US$, end-of-period)4.865.085.105.567.467.49
Sources: Data provided by the Solomon Islands authorities; and Fund staff estimates and projections.

Value for 2003 reflects customs clearance data.

Sources: Data provided by the Solomon Islands authorities; and Fund staff estimates and projections.

Value for 2003 reflects customs clearance data.

Table 3.Solomon Islands: Central Government Operations, 1998–2004(In percent of GDP)
19981999200020012002Est.

2003
Budget

2004
Revised

2004
Total revenue and grants29.027.022.123.518.739.849.248.1
Total revenue21.924.418.315.316.121.519.323.5
Tax revenue19.722.116.914.015.419.617.521.6
Income and profits8.38.76.35.14.85.34.96.1
Goods and services3.75.14.44.44.66.65.78.1
International trade7.78.36.14.56.17.76.97.4
Other revenue2.12.31.51.30.71.81.81.9
Stamp duty0.20.20.10.10.20.20.20.2
Licenses and fees0.20.20.10.10.20.20.20.2
Miscellaneous revenue1.71.91.31.00.31.41.41.5
Grants7.12.63.78.22.618.329.924.6
Development grants18.517.114.48.02.214.423.718.1
Recurrent budget grants2.30.30.70.30.53.96.36.5
Expenditure 1/28.230.329.736.129.739.647.344.1
Recurrent expenditure21.026.025.127.226.523.823.726.0
Compensation of employees10.211.213.313.111.79.710.010.0
Goods and services4.75.04.75.04.55.29.110.5
Interest1.74.23.51.33.42.91.71.7
Grants to provinces and others3.84.52.82.30.92.22.12.5
Employer social benefits0.20.60.30.00.20.20.20.2
Compensation payments and other0.40.40.55.45.83.60.61.1
Development expenditure7.24.34.68.93.215.723.718.1
Grant financed6.23.63.18.02.214.423.718.1
Concessional loan financed1.00.71.50.91.01.40.00.0
Recurrent balance (above-the-line) 2/3.2-1.3-6.1-11.7-9.91.51.94.0
Overall balance (above-the-line)0.8-3.3-7.6-12.6-10.90.21.94.0
Discrepancy (negative is net expenditure)-1.1-0.42.60.71.4-1.60.00.0
Overall balance (below-the-line)-0.3-3.7-4.9-11.9-9.6-1.41.94.0
Financing0.33.74.911.99.61.4
Foreign (net)4.91.90.65.03.80.4
Disbursements5.92.91.56.15.41.4
Amortization 1/-1.0-1.0-0.9-1.1-1.6-1.6
Debt forgiveness0.00.00.00.00.00.7
Domestic bank and nonbank (net)-1.4-0.14.2-1.4-2.9-6.6
Banking system 1/-3.0-0.15.2-3.3-1.0-6.6
Central bank-3.4-0.44.32.92.4-3.9
Commercial banks0.40.41.0-6.2-3.5-2.7
Nonbank 1/1.60.0-1.11.9-1.90.0
National Provident Fund2.10.1-1.40.7-1.20.0
Other-0.5-0.10.41.2-0.70.0
Privatization receipts0.01.80.00.00.00.0
Increase in expenditure arrears 3/-2.4-0.41.43.63.54.0
Increase in principal debt arrears-0.80.5-1.24.75.23.6
External-0.80.5-1.20.81.90.1
Domestic0.00.00.03.93.43.5
Sources: Data provided by the Solomon Islands authorities; and Fund staff estimates and projections.

Expenditures and debt-servicing are presented on an accrual basis.

Includes recurrent budget grant support; amortization payments are classified as budget financing.

Includes interest arrears.

Sources: Data provided by the Solomon Islands authorities; and Fund staff estimates and projections.

Expenditures and debt-servicing are presented on an accrual basis.

Includes recurrent budget grant support; amortization payments are classified as budget financing.

Includes interest arrears.

Table 4.Solomon Islands: Summary Accounts of the Banking System, 1998–2004
1998199920002001200220032004
I. Central Bank(In millions of S.I. dollars; end-of-period)
Net foreign reserves22524114891117248384
Net domestic assets-90-8975756-28-98
Credit to central government (net)2215801221609494
Claims825655185186186186
Deposits-60-4125-63-27-93-93
Other items (net)-112-103-73-65-104-121-192
Reserve money135152154149174221286
Currency outside banks81100888592103118
II. Monetary survey
Net foreign assets227247149102132273409
Net domestic assets213215316302287255200
Domestic credit356372458425471467480
Central and local government (net)178178259270298250237
Private sector178194199155173217243
Other items (net)-142-157-142-123-184-212-280
Broad money (M2)441462464403419528609
Narrow money221265248246247328378
Quasi money220198216157172201231
(Annual percentage change)
Net foreign assets47.98.9-39.8-31.830.2106.449.7
Net domestic assets-23.00.746.8-4.4-4.8-11.0-21.6
Net domestic credit-3.54.722.9-7.211.0-0.92.8
Of which: Private sector25.38.31.8-21.812.226.112.0
Broad money (M2)2.34.90.5-13.24.026.015.2
Memorandum items:
Velocity of broad money (marketed output)2.72.62.32.52.52.22.1
Money multiplier3.33.03.02.72.42.42.1
Excess liquidity to deposits ratio (end-of-period)9.69.28.712.817.319.626.6
Sources: Data provided by the Central Bank of Solomon Islands; and Fund staff estimates and projections.
Sources: Data provided by the Central Bank of Solomon Islands; and Fund staff estimates and projections.
Table 5.Solomon Islands: Indicators of External Vulnerability, 1998–2003
19981999200020012002Est.

2003
Financial indicators
Government sector debt (in percent of GDP)62.262.565.482.296.2100.2
Broad money (percent change; 12-month basis)2.34.90.5-13.24.026.0
Private sector credit (percent change; 12-month basis)25.38.31.8-21.812.226.1
3 month Treasury bill yield (in percent; nominal)6.06.07.38.98.36.6
3 month Treasury bill yield (in percent; real)-5.6-1.90.41.2-0.9-3.1
External indicators
Exports (percent change; 12-month basis in U.S. dollars)-27.6-3.6-46.5-27.623.627.4
Imports (percent change; 12-month basis in U.S. dollars)-40.7-12.9-11.9-7.6-31.336.8
Terms of trade (percent change; 12-month basis)-7.015.8-11.0-11.430.5
Current account balance (in percent of GDP)-1.63.1-10.6-12.8-6.91.4
Capital account balance (in percent of GDP)15.1-1.28.517.26.311.0
Gross official reserves (in millions of U.S. dollars)48.050.431.318.517.535.9
Central bank short-term foreign liabilities (in millions of U.S. dollars)1.73.02.42.21.72.9
Official reserves (in months of next year’s imports of GNFS)3.64.63.12.82.13.6
Broad money to reserves1.91.92.94.34.32.0
Total external government debt (in percent of GDP)37.739.342.049.066.772.6
Total external government debt to exports of GNFS65.974.9110.5187.0202.4171.7
External interest payments to exports of GNFS (accrual)0.90.91.54.15.75.1
External amortization payments to exports of GNFS (accrual)1.81.82.44.04.43.8
Exchange rate (SI$/US$; period average)4.824.845.095.286.757.51
Exchange rate (SI$/US$; end-of-period)4.865.085.105.567.467.49
Real effective exchange rate appreciation (12-month basis)-6.42.66.78.7-16.7-13.2
Sources: Data provided by the Solomon Island authorities; and Fund staff estimates.
Sources: Data provided by the Solomon Island authorities; and Fund staff estimates.
APPENDIX Solomon Islands: Medium-Term Outlook and Risks

Achieving sustained growth in private sector activity in the urban and rural areas is essential to improve living standards and social indicators in the Solomon Islands, and thereby reduce remaining inter-island tensions. This will require continued fiscal restraint while reprioritizing expenditures, large infrastructure and other development spending to support private investment, a cautious approach to monetary and exchange rate policies, and strong structural reform to address the significant growth impediments that are outlined in the staff report.

Medium-term outlook

The staff has prepared a medium–term outlook based on this scenario (Appendix Table 1). The annual growth rate averages almost 5 percent during 2004–09, driven initially by donor-financed public investment and later by private investment and exports as donor involvement is scaled back. While ambitious, this growth rate is not out of reach provided early action is taken to address the current structural impediments to private sector investment. Work on improving infrastructure has already started, aided by the reactivation of the Asian Development Bank’s post-conflict rehabilitation loan, and the authorities have started to consider the regulatory and land ownership issues that have impeded foreign and domestic investment. The export-oriented agricultural and fisheries sectors would benefit from these developments, as would the tourism and minerals sectors that also have significant potential. The export/GDP share is envisaged to gradually increase by 3 percent of GDP, and the share of private investment by 2½ percent of GDP, backed by rising foreign direct investment in the minerals and other sectors. The current account deficit peaks in 2005 in line with the large development outlays and associated imports, and falls back to 2 percent of GDP by 2009 with the improving export performance. The level of international reserves increases in U.S. dollar terms, but declines somewhat as a share in months of (rising) imports. Inflation will remain contained at about 3 percent a year, and the real exchange rate is assumed to remain broadly unchanged at its current level.

Appendix Table 1.Solomon Islands: Medium-Term Adjustment Scenario, 2002–09
Est.Projections
20022003200420052006200720082009
Growth and prices (percentage change)
Real GDP-1.65.14.24.44.74.85.05.1
Of which: Marketed output-3.68.04.94.85.25.35.65.7
CPI (period average)9.410.15.62.53.23.03.03.0
CPI (end-of-period)15.43.85.13.43.03.03.03.0
Saving and investment (percent of GDP)
Public saving-investment balance-9.6-1.44.0-0.4-0.8-0.8-0.7-0.5
Of which: Public investment3.215.718.121.413.38.27.67.1
Private saving-investment balance2.62.9-4.6-9.0-4.5-2.0-1.5-1.5
Of which: Private investment14.917.017.218.018.719.419.619.5
Central government operations (percent of GDP)
Total revenue18.739.848.146.938.934.033.533.0
Recurrent revenue16.121.523.524.724.925.225.225.3
Grants2.618.324.622.214.08.98.37.7
Development grants2.214.418.120.212.17.16.76.2
Recurrent budget grants0.53.96.52.01.91.71.61.5
Total expenditure 1/29.739.644.147.439.734.834.233.5
Recurrent expenditure 1/26.523.826.026.026.426.626.526.4
Of which: Recurrent costs of new development projects0.81.92.42.62.8
Development expenditure3.215.718.121.413.38.27.67.1
Recurrent balance-9.91.54.00.80.30.30.30.5
Overall balance 2/-9.6-1.44.0-0.4-0.8-0.8-0.7-0.5
Foreign financing (net)3.80.4-1.1-1.1-0.9-0.9-1.7-1.0
Domestic financing (net)-2.9-6.6-0.41.51.51.41.71.4
Privatization receipts0.00.00.00.20.40.40.70.1
Increase in expenditure arrears3.54.0-5.0-2.4-0.2-0.20.00.0
Increase in principal debt arrears5.23.6-8.9-2.10.00.00.00.0
Restructured arrears0.00.011.44.20.00.00.00.0
Stock of expenditure arrears (percent of GDP; end-of-period)11.514.48.15.24.74.23.93.6
Stock of domestic principal debt arrears (percent of GDP; end-of-period)7.19.90.00.00.00.00.00.0
Central government debt (percent of GDP) 3/96.2100.292.587.381.676.070.265.1
Domestic29.527.626.426.125.224.323.723.0
External66.772.666.161.256.451.746.442.2
External debt (millions of U.S. dollars, end-of-period)151.6163.9159.7156.9154.5151.8146.5143.1
External debt service to exports of GNFS (accrual basis)10.18.86.37.16.25.87.05.3
Monetary and credit (percentage change; end-year data)
Net foreign assets30.2106.449.76.02.63.43.03.8
Net domestic assets-4.8-11.0-21.618.017.615.715.814.2
Of which: Credit to private sector12.226.112.07.37.98.18.38.4
Broad money4.026.015.29.97.98.18.38.4
Interest rate (3-month Treasury bill rate, average)8.36.6
Balance of payments (millions of U.S. dollars; unless otherwise indicated)
Exports, f.o.b58.274.283.088.195.5106.3115.3124.1
Imports, c.i.f.-62.3-85.2-102.0-119.6-118.2-123.4-131.7-140.6
Nonfactor services (net)-0.56.03.73.13.94.65.25.5
Net current transfers-5.413.416.16.16.16.16.16.0
Current account-15.73.2-1.4-24.3-14.6-8.2-6.9-6.5
(Percent of GDP)-6.91.4-0.6-9.5-5.3-2.8-2.2-1.9
Capital account6.311.016.126.815.89.88.38.5
Foreign investment (net)1.0-0.2-0.21.83.85.86.86.8
Overall balance (accrual)-9.414.314.72.51.11.61.41.9
Gross official reserves (millions of U.S. dollars; end-of-period)17.535.952.154.555.657.358.760.6
(in months of next year’s imports of GNFS)2.13.64.54.74.64.44.24.1
(in months of next year’s imports of GNFS, net of external arrears)0.11.82.94.14.03.93.73.6
(in months of next year’s non-project imports of GNFS)2.64.55.55.45.04.84.64.4
Sources: Fund staff estimates and projections.

Expenditures are presented on an accrual basis.

Overall balance is calculated from below-the-line financing data.

Includes debt amortization arrears.

Sources: Fund staff estimates and projections.

Expenditures are presented on an accrual basis.

Overall balance is calculated from below-the-line financing data.

Includes debt amortization arrears.

Fiscal policy in this scenario would be oriented toward supporting private sector activity and improving social indicators while, at the same time, reducing the level of government debt. A deficit of around ½ percent of GDP a year, combined with robust economic growth, would support a reduction in the government debt ratio from its current level of 100 percent of GDP to 65 percent of GDP by 2009.1 This will require an increase in the revenue share of 1½ percent of GDP between 2004 and 2009, which can be achieved by strengthening tax administration and widening the tax base. In this scenario, domestic and external debt servicing remains around 15 percent of annual domestic revenue, consistent with the authorities’ debt-restructuring strategy. Due to the current high external debt share (73 percent of GDP) and significant foreign grant inflows, newly contracted concessional debt is expected to be limited, underpinning a sharp decline in the level of external debt (to 42 percent of GDP by 2009) as net repayments average 1 percent of GDP a year. In these circumstances, the deficit is assumed to be primarily financed from domestic sources, helped by the eventual reopening of the treasury bill market after the restructuring negotiations of existing debt obligations have been concluded.

Grant revenue (classified above-the-line) declines as general budget financing from donors is scaled back starting in 2005 (in line with donor indications), which leads to a large decline in the fiscal surplus in 2005 compared with that projected for 2004. Expenditure pressures for social and infrastructure outlays and new operations and maintenance expenditures will be large. While some savings are assumed from the reprioritization of current outlays, expenditures not backed by development grants nonetheless increase by around 1 percent of GDP over the forecast period.

External debt sustainability in the medium-term baseline

The Solomon Islands’ current external debt level is high, although the debt-servicing burden is manageable. The current estimated NPV of external debt relative to GDP (44 percent), exports (102 percent), or government revenue (219 percent) is above indicative thresholds for other low-income countries (Appendix Table 2). However, the current debt service burden as a share of the recently improved level of exports (6 percent) or revenue (12 percent) appears manageable. During the projection period, all sustainability indicators improve steadily due to the net repayments to external creditors, rapid growth of GDP, and the increased levels of revenue and exports in the projection period. Specifically, the ratios of the NPV of external debt to major macroeconomic aggregates fall by roughly one-half of their current levels over the next five years, while debt service indicators would remain broadly stable.

Appendix Table 2.Solomon Islands: Sensitivity Analyses for Key Indicators of Government External Debt, 2003–09(In percent)
EstimatesProjections
2003200420052006200720082009Average 2004–09
NPV of Debt-to-GDP Ratio
Baseline4844413733302735
A. Alternative Scenarios
A1. Key variables at their historical averages in 2005–09 1/4844444546484946
A2. New public sector loans on less favorable terms in 2005–09 2/4844413734312836
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2005–064844464742383442
B2. Export value growth at historical average minus one standard deviation in 2005–06 3/4844475551474348
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2005–064844464843393542
B4. Net non-debt creating flows at historical average minus one standard deviation in 2005–06 4/4844484945413844
B5. Combination of B1–B4 using one-half standard deviation shocks4844598074696465
B6. One-time 30 percent nominal depreciation relative to the baseline in 2005 5/4844575247433847
NPV of Debt-to-Exports Ratio
Baseline113102948474665980
A. Alternative Scenarios
A1. Key variables at their historical averages in 2005–09 1/113102102102102105108103
A2. New public sector loans on less favorable terms in 2005–09 2/113102948575686181
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2005–06113102948474665980
B2. Export value growth at historical average minus one standard deviation in 2005–06 3/113102154255229210193190
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2005–06113102948474665980
B4. Net non-debt creating flows at historical average minus one standard deviation in 2005–06 4/11310211011199908299
B5. Combination of B1–B4 using one-half standard deviation shocks113102143205184169156160
B6. One-time 30 percent nominal depreciation relative to the baseline in 2005 5/113102948474665980
Debt-Service-to-Exports Ratio
Baseline96766756
A. Alternative Scenarios
A1. Key variables at their historical averages in 2005–09 1/967771088
A2. New public sector loans on less favorable terms in 2005–09 2/96766756
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2005–0696766756
B2. Export value growth at historical average minus one standard deviation in 2005–06 3/96101313151211
B3. U.S. dollar GDP deflator at historical average minus one standard deviation in 2005–0696766756
B4. Net non-debt creating flows at historical average minus one standard deviation in 2005–06 4/96766756
B5. Combination of B1–B4 using one-half standard deviation shocks96810101299
B6. One-time 30 percent nominal depreciation relative to the baseline in 2005 5/96766756
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/484848484848
Source: Fund staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Source: Fund staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is 2 percentage points higher than in the baseline, while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Risks to the medium-term scenario

Several factors pose risks to the outlook described above. The staff has undertaken a series of stress tests to check the country’s resilience to external and domestic shocks. The stress tests were conducted using one-standard-deviation shocks that last for two years to the 10-year historical data averages for economic growth, export value growth, the U.S. dollar GDP deflator, and for nondebt creating flows, for a one-half standard deviation shock to all these variables combined, and for a 30 percent nominal exchange rate depreciation.

NPV of debt-to-GDP ratio

The stress tests suggest that a temporary shock to the economic growth rate or the exchange rate has a large but manageable impact on the external debt level (Appendix Table 2). As long as the policy environment remains sound, the debt stock returns to its declining path and does not exceed the initial debt level. The most extreme shock arises in the event of the combined shock, where the NPV of the external debt-to-GDP ratio increases to 64 percent by 2009, compared with the projected decline to 27 percent in the baseline estimate. In regard to the servicing burden, the external debtservicing ratio is most sensitive to a one-standard-deviation shock in the export growth rate, where it would increase from its current level of around 6 percent to reach 15 percent in 2008 before falling back slightly.

Debt service-to-exports ratio

These results highlight the potential vulnerabilities faced by the Solomon Islands economy to adverse shocks, especially if the pace of economic and export growth proves less favorable than currently envisaged. Given these uncertainties in future economic developments, following a cautious approach to fiscal and other macroeconomic policies under the control of the government will be essential to provide the flexibility needed to respond to potential adverse developments in economic activity and/or the external environment.

ANNEX I Solomon Islands: Fund Relations

(As of May 31, 2004)

I. Membership Status: Joined 9/22/78; Article VIII

II. General Resources Account:

SDR MillionPercent Quota
Quota10.40100.00
Fund holdings of currency9.8594.73
Reserve position in Fund0.555.29

III. SDR Department:

SDR MillionPercent Allocation
Net cumulative allocation0.65100.00
Holdings0.000.32

IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

TypeApproval

Date
Expiration

Date
Amount

Approved

(SDR Million)
Amount

Drawn

(SDR Million)
Stand-by6/22/836/21/842.400.96
Stand-by5/29/815/28/821.600.80

VI. Projected Obligations to Fund:

(SDR Million; based on existing use of resources and present holdings of SDRs):

20042005200620072008
Principal0.010.010.010.010.01
Charges/Interest0.010.010.010.010.01

VII. Exchange Rate Arrangements:

Since November 2000, the exchange rate for the S.I. dollar has been based on an undisclosed trade-weighted basket of the currencies of the Solomon Islands’ major trading partners, with the U.S. dollar as the intervention currency. During 2002, as pressures on external reserves intensified, the Central Bank of Solomon Islands (CBSI) accelerated the rate of currency depreciation, leading to a gradual real depreciation of the S.I. dollar. Since December 2002, the CBSI has kept the exchange rate broadly stable against the U.S. dollar, although there is no public commitment to continue to do so.

VIII. Last Article IV Consultation:

The 2002 Article IV consultation discussions were held in Honiara during November 4–12, 2002. The staff report (January 13, 2003) was considered by the Executive Board and the consultation concluded on January 24, 2003.

IX. Technical Assistance:

DateDepartmentPurposeDuration
Short-term
January 14, 1998PFTACStatisticsTwo weeks
February 3, 1998PFTACTax administrationOne week
May 4, 1998PFTACTax administrationFour weeks
June 7, 1998PFTACBanking supervisionTwo weeks
June 30, 1998PFTACBalance of payments statisticsTwo weeks
November 28, 1998PFTACPublic financial managementOne week
February 9, 1999PFTACBanking supervisionOne week
September, 1999MAETreasury bill auctions and monetary operationsEight weeks
October 3, 2000MAEAdvisor to CBSITwo weeks
May, 2001PFTACBanking supervisionOne week
October 2002PFTACBanking SupervisionTen days
January 2003PFTACStatisticsOne week
February 2004PFTACStatisticsOne week
March 2004PFTACTax administrationFive days
May 2004PFTACTax administrationFive days
Long-term
June 1995–June 1999;MAEAdvisor to CBSI GovernorFive years extended in October 1999 through October 2000.
January 2001–presentMAEPeripatetic Advisor to CBSI GovernorTen six-week missions

X. Resident Representative: None

ANNEX II Solomon Islands: Poverty and Human Development Indicators

Social indicators of poverty and human development are low in the Solomon Islands. The country ranks below all Pacific island countries, except Papua New Guinea and Vanuatu, in the United Nations Human Development Index, coming in at 123 out of 175 countries. There are few recent poverty statistics, but anecdotal evidence suggests poverty remains high. However, the more extreme forms of poverty, such as malnourishment, have remained limited due to an abundant resource base, assured access to customary land tenure, and resilient social networks. This advantage is under pressure from a population growth rate that, at almost 3 percent a year, is amongst the highest in the world.

Nonetheless, the Solomon Islands has achieved some significant progress in improving living conditions since independence despite falling per capita incomes. Prior to the outbreak of the civil conflict in 1999, sizable health and education expenditures (at 3–5 percent of GDP each) and high per capita aid inflows had helped underpin these improvements. Providing widespread and quality education to the very young population (42 percent under age 14) is a challenge. The primary education enrollment ratio is about 80 percent, although primary education is neither compulsory nor free. School fees reportedly are an important hindrance to achieving universal primary education. The enrollment ratio is only 30 percent in secondary education. In regard to health industries, Malaria is rampant, with the highest rate of infection in the world outside of sub-Saharan Africa, and more than a third of the rural population lacks access to safe water.

The paucity of data makes an assessment of human development trends since the outbreak of the civil conflict in 1999 difficult, but it is likely that the positive trend was halted, if not reversed. Public service delivery was hampered by the conflict, and large inter-island migrations put strains on the existing capacity. Agricultural production for market declined sharply due to the lack of security and transport services.

The aggregate social indicators mask large differences between urban and rural areas. The two main problems in the rural sector are the lack of essential public services such as health and education, and cash income due to difficulties in market access for rural products grown. While the urban areas have better social services and average incomes are higher, the urban poor face difficulties in securing employment and land for residence.

The government has adopted the MDGs in its National Economic Recovery, Reform, and Development Plan, and has committed to monitor progress towards them. Achieving the MDGs by 2015 is still possible, but remains a major challenge. Progress in some areas, such as reducing infant mortality and ensuring environmental sustainability, has so far been inadequate.

Solomon Islands: Millennium Development Goals Progress
19901995Latest Data

2001–02
Target

2015
Goal 1: Eradicate Extreme Poverty and Hunger
Prevalence of child malnutrition (percent of children under 5)212111
Goal 2: Achieve Universal Primary Education
Gross primary enrollment ratio (percent of relevant age group)77100
Goal 3: Promote Gender Equality
Ratio of girls to boys in primary and secondary education (percent)7779100
Proportion of seats held by women in national parliament (percent)22
Goal 4: Reduce Child Mortality
Under 5 mortality rate (per 1,000)36302512
Infant mortality rate (per 1,000 live births)29252110
Goal 5: Improve Maternal Health
Maternal mortality ratio (per 100,000 live births)550138
Births attended by skilled health staff (percent of total)8576
Goal 6: Combat HIV/AIDS, Malaria and Other Diseases
Incidence of tuberculosis (per 100,000 people)87
Incidence of malaria (per 100,000 people)16,971
Goal 7: Ensure Environmental Sustainability
Forest area (percent of total land area)9291
Nationally protected areas (percent of total land area)00.3
CO2 emissions (metric tons per capita)0.50.40.4
Access to an improved water source (percent of population)7136
Access to improved sanitation (percent of population)34
Goal 8: Develop a Global Partnership for Development
Fixed line and mobile telephones (per 1,000 people)151821
Personal computers (per 1,000 people)2551
Source: World Development Indicators, Human Development Indicators.
Source: World Development Indicators, Human Development Indicators.
ANNEX III Solomon Islands: Relations with the World Bank Group

(As of May 20, 2004)

Following the repayment of debt servicing arrears in September 2003, the Solomon Islands came out of non-accrual status and country relations have been normalized. As a consequence, the suspended Health Sector Development Project (US$4 million equivalent) has been reactivated with a mid-term review scheduled for June 2004.

A joint Asian Development Bank-World Bank assessment mission took place in October 2003, with a follow-up in March 2004. As a result, the World Bank has launched a program comprising small grants and analytical/advisory services for the Solomon Islands Government. Strategic partnership with other donors is a key principle of World Bank support so that activities can be leveraged effectively; the Bank does not envision any new loans in the short term. Details of World Bank activities are given below.

  • Economic reform: The World Bank is preparing analytical work to support policy advice on macroeconomic management and economic reform priorities, including support to a proposal Economic Reform Unit.
  • Financial sector reform: At the request of the CBSI, an Institutional Development Fund grant of US$ 254,000 has been approved to support policy advice on financial sector supervision, including for nonbank financial institutions, and relevant macroeconomic analysis.
  • Energy: An initial review of Solomon Islands Energy Authority was completed in February 2004, and discussions with the government, AsDB, and Australia are ongoing on appropriate next steps in financial/management restructuring. The Bank is also exploring options for rural electrification.
  • Telecommunications: Assistance with sector policy development and establishment of effective regulatory capacity is being provided, and the Bank is exploring options to enhance rural telecommunications access.
  • Rural income generation: The Bank is designing a small project activity (grant-financed) to support pilot initiatives in rural areas to help improve the access of small farmers to the cash economy and to generate increased incomes on a sustainable basis.
  • Foreign Investment Promotion: The government has requested policy advice and technical assistance from the Foreign Investment Advisory Service (FIAS) to prepare a new Investment Promotion Bill. This would resurrect work initiated in 1999. FIAS has agreed in principle and will prepare a proposal for management consideration. FIAS has also agreed to assist in the review of customs and tax incentives in conjunction with technical assistance supported by PFTAC.
  • Education policy: Discussions are ongoing in the areas of the National Training Plan (scholarships, training needs, tertiary planning), Technical/Vocational Education Plan and strategies, Distance Education Plan and strategy, and developing and monitoring Basic Education indicators. These areas would complement the education sector reforms that the government is implementing with the support of the EU and NZAID.
Solomon Islands: IDA Lending Operations(as of February 29, 2004)
Disbursed (US$)Undisbursed (US$)
Health Sector Development Project1,323,9952,909,396

Contact person: Natasha Beschorner, Country Program Coordinator, Tel: 202-473-2598

ANNEX IV Solomon Islands: Relations with the Asian Development Bank

(As of May 20, 2004)

Since joining the AsDB in 1973, the Solomon Islands has received 16 loans for a total amount of US$79.3 million, and 53 TA projects for a total amount of US$10.9 million. The loan and TA projects have been in agriculture and fisheries, transportation, infrastructure rehabilitation, finance, power, water supply and sanitation, ports, reform of state owned enterprises, and institutional development of government ministries and public agencies, particularly the executing agencies of AsDB-financed projects.

During 1994–97, no new operations were initiated because of government arrears on debt servicing obligations. In 1998, with the clearance of overdue loan payments to the AsDB, lending and TA operations resumed. In August 1998, the ADB approved a US$25 million policy-based program loan and a US$1 million TA loan to support the Government’s Public Sector Reform Program. The program loan helped finance adjustment costs associated with the reform program, particularly the clearance of government arrears to external and domestic creditors, and separation payments made in 1999 to civil servants. The first tranche of the program loan (US$15 million) was disbursed in November 1998. The second tranche of the loan was not released and was eventually cancelled since, subsequent to the outbreak of ethnic unrest in mid-1999, a new government did not support the program’s objectives. In 2000, the AsDB approved a US$10 million post-conflict emergency rehabilitation project loan. However, due to debt servicing arrears, AsDB suspended its operational program in the Solomon Islands in February 2002. Following the settlement of the arrears by Australia on behalf of the Solomon Islands Government in September 2003, AsDB resumed its country operations. The country strategy and program is being formulated for approval in mid-2004.

AsDB operations in the Solomon Islands are guided by the Pacific Strategy for the New Millennium that was approved in 2000. AsDB is currently formulating a new Pacific development strategy for the period 2005–08. Project processing is undertaken by the Pacific Operations Division (PAHQ) in Manila, while project implementation is administered largely by AsDB’s South Pacific Regional Mission located in Vanuatu.

Loans, Approvals, and Disbursements, 1997–2002(In millions of U.S. dollars)
199719981999200020012002
Loan approvals0.0026.00--10.00----
Loan disbursements0.0015.670.320.450.010.00
Cumulative loan amount approved
(as of end-of-year)43.3169.3169.3179.3179.3179.31
Cumulative net effective loans
(as of end-of-year)37.6164.9464.6554.3064.0564.83
Cumulative disbursement
(as of end-of-year)37.6153.2953.6154.0754.0754.07

Contact person: Robert Guild, Desk Officer for the Solomon Islands.

ANNEX V Solomon Islands: Support from the Pacific Financial Technical Assistance Center1

(As of May 20, 2004)

The Center’s assistance to the Solomon Islands since 1996 has included 19 advisory missions, mostly before 1999. The Solomon Islands sent 19 officials to seminars and workshops, and PFTAC organized 9 attachments (including for the manager of CBSI’s Financial Institutions Department to a seminar in Washington).

Public financial management

PFTAC participated in two PEM missions in 1998, one with AusAID, and one with UNDP, to explore the scope for sustainable improvements in financial management. An advisor was a member of the August 2002 IMF mission and reviewed the PEM system. The priority was the rehabilitation of public financial management, including strengthening expenditure and commitment controls, tightening treasury and cash management operations, and improving the budget and accounting system. Indications are that the situation has considerably improved in recent months.

Tax administration and policy

During several missions before February 1999, PFTAC provided input to the administration improvement projects proposed by AusAID and NZAID. Following a review of the Inland Revenue administration, two four-week consultancies for strengthening the audit area were also organized in May and November 1998. In 2003, discussions were held at PFTAC Headquarters on a decentralization strategy that revealed that the tax system is in need of reform. A tax and customs administration mission took place in March and May 2004 with the involvement of a customs expert, partly to determine future PFTAC involvement.

Financial sector regulation and supervision

In late 2002, PFTAC participated in an on-site review of the domestically owned commercial bank. Technical assistance in bank ownership issues, the quality of bank holdings of government bonds, and the supervision of the National Provident Fund has been provided to the CBSI staff in the PFTAC Headquarters. PFTAC also funded the attachment of a CBSI bank examiner to the Reserve Bank of Fiji and the participation of CBSI staff in regional supervision workshops.

Economic and financial statistics

A January 2003 mission revealed that the National Statistics Office (NSO) was barely functional, having suffered severe losses of resources and records in previous years. At that time, PFTAC recommended the temporary transfer of staff responsible for producing the CPI to the CBSI. Following stabilization of the country, the NSO has been partially re-equipped; the CPI is again being produced in the NSO and a business survey for national accounts is planned for mid-2004. A further PFTAC mission in February 2004 devised a recovery plan, including the provision of a long-term adviser, training attachments, and future technical assistance.

Contact person: Luc Leruth, Project Coordinator.

ANNEX VI Solomon Islands: Statistical Issues

The Solomon Islands’ economic database is poor. The only institution that has provided regular data in the last two years is the Central Bank of the Solomon Islands (CBSI). The staff of the National Statistical Office (NSO) was relocated to the CBSI given the inadequate resources and the lack of security in the Ministry of Finance. NSO is now in the process of recovery, and it is gradually re-taking over data collection and publication responsibilities.

The CBSI publishes data on the real, external, fiscal, and monetary sectors in its Monthly Review, Quarterly Review, and Annual Report. There is a Solomon Islands country page in IFS, but delays often occur.

A GDDS mission from PFTAC visited the Solomon Islands in February 2004 to assess the situation and propose an action plan for recovery. The mission concluded that rebuilding the statistical system required extensive TA over at least two years and external funding. The mission recommended the appointment of a chief statistician and an externally funded long-term adviser. The mission also noted the urgency of conducting a business survey and a household income and expenditure survey in order to provide a new base for the national accounts and CPI and enable an assessment of poverty levels. The mission further identified a number of statistical issues which need priority attention, including; liaising with the National Provident Fund to arrange for the receipt of data on employment and other statistics; increasing the response rate on BOP surveys; reducing the dependence on Foreign Exchange Transaction records for BOP purposes; resuming use of Customs data for the estimation of imports; and considering a Population Census as significant population movements in recent years make the 1999 Census results unreliable for planning and analysis purposes.

Real sector

The NSO has not produced national accounts data since 1994. The task was taken over by the CBSI, but its annual estimates build on a limited amount of raw data, primarily commodity exports. Data on production of major export commodities are reported on a monthly basis. Data on employment and wages are not produced. The NSO reclaimed the task of producing the CPI for Honiara from the CBSI in August 2003.

Money and banking statistics

Monetary statistics are compiled by the CBSI on a monthly basis and are provided to the IMF with a two to four week lag.

Public finance

The Ministry of Finance started disseminating monthly press releases on budget realizations in August 2003. The CBSI published data on revenue and expenditure during the conflict, although the reliability of these data is in doubt given the break down of accounting mechanisms and the large expenditure arrears. Data for the provincial government finances are not available.

External sector

Partial quarterly balance of payments data are estimated by the CBSI on the basis of cash foreign exchange transactions reported through the banking system and are available with a three-month lag. In the absence of supplementary surveys (e.g., on foreign direct investment and aid inflows), such data are deficient in both detail and coverage.

Solomon Islands: Core Statistical Indicators(As of June 28, 2004)
Exchange

Rates
International

Reserves
Reserve/

Base

Money
Central

Bank

Balance

Sheet
Broad

Money
Interest

Rates
Consumer

Price

Index
Exports/

Imports 1/
Current

Account

Balance 1/
Public

Debt/Debt

Service
Overall

Government

Balance 2/
GDP 3/
Date of Latest Observation 4/5/28/045/28/045/28/045/28/045/28/045/28/043/037/31/0212/01199919991999
Date Received 4/6/24/046/24/046/24/046/24/046/24/046/24/045/047/31/0212/013/003/003/00
Frequency of Data 5/WWWWWWMQQAAA
Frequency of Reporting 5/WMMMMMMUpon requestUpon requestUpon requestUpon requestUpon request
Frequency of PublicationDMMMMMMAAAAA
Source of DataPublic mediaCentral BankCentral BankCentral BankCentral BankCentral BankStatistics Dept.Central BankCentral BankMinistry of FinanceMinistry of FinanceCentral Bank
Mode of ReportingE-mailE-mailE-mailE-mailE-mailE-mailFaxFaxFaxFaxFaxFax
Confidentiality 6/PPPPPPPPPPPP

Detailed balance of payments data derived from foreign exchange transactions through the banking system are available on a quarterly basis with a 3-month lag.

Given the lack of availability of expenditure data, the government balance is estimated based on available data on financing.

The most recent official data are for 1994, but the central bank has produced estimates through 1999.

Includes data received following specific requests by Fund staff.

A = annually; D = daily; M = monthly; Q = quarterly; W = weekly.

P = publicly released information.

Detailed balance of payments data derived from foreign exchange transactions through the banking system are available on a quarterly basis with a 3-month lag.

Given the lack of availability of expenditure data, the government balance is estimated based on available data on financing.

The most recent official data are for 1994, but the central bank has produced estimates through 1999.

Includes data received following specific requests by Fund staff.

A = annually; D = daily; M = monthly; Q = quarterly; W = weekly.

P = publicly released information.

1The medium-term scenario and debt-sustainability analysis are detailed in the Appendix, and recent trends in social indicators relative to the MDGs are outlined in Annex II.
2There is probably little room to raise tax rates in the Solomon Islands because, with the exception of excises, rates are already on the high side relative to other Pacific islands.
3Most external debt is owed to the World Bank and Asian Development Bank (57 percent of the total), Taiwan Province of China (16 percent), and two commercial creditors (10 percent). The authorities have been in contact with the external creditors in which they are in arrears, and informed them of their intention to discuss soon an agreed repayment arrangement.
4The real exchange rate is estimated to be 20 percent below its level before the outbreak of the conflict in 1999 and 10 percent below its level in the mid-1990s. The staff’s REER estimates are tentative given the absence since mid-2000 of comprehensive price data.
5Effective April 2004, the central bank raised the indicative minimum approval limit on all outward payments from SI$5,000 to SI$25,000, and confirmed to staff that, for transactions above this limit, this approval is necessary only for the purpose of checking the bona fide nature of transactions. They also raised the overnight limit on commercial bank foreign exchange holdings from SI$2 million to SI$3 million.
6In July 2003, the Solomon Islands also ratified the Pacific Agreement on Closer Economic Relations (PACER) that is intended eventually to create a free trade area and regional integration between the Pacific islands and Australia and New Zealand.
7The rating could be improved once detailed information on the tariff schedule has been received from the authorities.
8The three laws are the Money Laundering and Proceeds of Crime Act (2002), the Mutual Assistance in Criminal Matters Act (2002), and the Financial Institutions Act (1998).
1In line with the authorities’ current intentions, the staff’s medium-term scenario assumes the securitization of the arrears on pension contributions for government employees due to the NPF (2½ percent of GDP), and the repayment of the other arrears on wage-deductions in 2004–05 (2½ percent of GDP). The balance of the domestic arrears (around 8 percent of GDP) is assumed to be settled in line with any overperformance on the annual revenue targets.
1The Pacific Financial Technical Assistance Centre (PFTAC) in Suva, Fiji is a regional technical assistance institution operated by the IMF with financial support of the Asian Development Bank, Australia, Japan, and New Zealand. The Centre’s aim is to build skills and institutional capacity for effective economic and financial management that can be sustained at the national level. Member countries are: Cook Islands, Federated States of Micronesia, Fiji, Kiribati, Marshall Islands, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tokelau, Tonga, Tuvalu, and Vanuatu.

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